Ask the Experts: When Profit Meets Social Purpose

Ask the Experts: When Profit Meets Social Purpose

Can impact investment be an effective tool to reduce poverty?

Michael Edwards Answers:

Judging by the amount of buzz around impact investing, social enterprise and corporate social responsibility, one could be led to believe that these ideas provide the key to social progress in Latin America. But this would be a dangerous delusion, threatening to divert support from the kinds of public action and civil society activism that have reduced poverty and inequality across much of the region to levels that compare quite favorably with the United States.

Redistributive policies like raising the minimum wage, investing in education and strengthening the social safety net have had important effects across Latin American societies, mirroring the earlier experiences of successful development in East Asia and elsewhere. These experiences show that only a dynamic market economy can create the surplus that progressive social goals require; but only strong government intervention and sustained citizen pressure can direct the benefits of growth in the long-term public interest.

Of course, it would be crazy to discourage more social responsibility in business, and there will always be instances in which private investment can help to expand the provision of socially and environmentally useful goods and services—like microcredit and the spread of energy-efficient technologies. But the health and education of the poor and how we care for each other and create healthy communities will never generate the short-term returns that are required to pull in private resources on the necessary scale. “Social capital markets” will create a patchwork of social provisioning in place of guaranteed, universal access to services—and nowhere in Latin America will gain from that.

Experiments in impact investing and the like should be encouraged, but they are the icing on the cake of a more responsible capitalism: tasty and attractive, but a thin layer on top of the thick mix of policy action that really holds things together.

Ron Cordes Answers:

In November 2008, I led a group to a small village in rural Uganda. We were there to visit a microfinance program, run by a local widows group, in which our family foundation had made a seed investment. Many of these women had lost their husbands to the decades-long civil war in northern Uganda, and the microfinance program was providing them the opportunity to create livelihoods for their families.

As we toured the small businesses these women had created with their microloans, one of them turned to me and said, “We appreciate it when you [visitors from the U.S.] come here to try and save our children. But we need to save our own children. Thank you for investing in us so we can do this.”

That moment was transformational for me. I returned to the U.S. committed to find ways to effectively deploy capital not only into microfinance but also into other investments that could provide a hand up to those at the bottom of the economic pyramid. Some examples of the latter could include low-cost private education, community water and sanitation projects, and the effective distribution of goods and services to meet previously unmet needs.

Since returning from Uganda, we’ve deployed over 30 percent of our family foundation’s investment portfolio into impact investments.

Through this process, I’ve come to appreciate the true power of the impact investment movement as an effective tool to reduce poverty—not as a replacement for traditional philanthropy, but rather as a catalyst to leverage the philanthropic and government aid dollars that have previously been the only source of funding available to attack poverty.

Is impact investment a “silver bullet” to solve the problem of poverty in the developing world? No. But in our portfolio it has become a powerful new tool to lift up the bottom billion and enable them to become architects of their own solutions.

Stuart Yasgur Answers:

As a new field, impact investing has tremendous potential to address the challenges of poverty. The question is not whether it can, but whether it will.

Dealing with entrenched poverty requires new solutions. A narrow focus on economic growth was never enough. And today, with increased concentration of wealth, the benefits of prosperity exclude too many.

Further, it distracts us from asking the central question: how do we animate market dynamics to address social challenges? How can we create markets that effectively play their fundamental role of creating value in society?

Answers to these questions will require fundamental, but often eminently achievable, changes. That is the primary role of the social entrepreneur, to change the basic systems of our societies. And their innovative new approaches often show that the barriers to progress on entrenched social problems are not impossible to overcome.

For example, it is easy to assume that the working poor lack the material assets to improve their circumstances. But Ashoka Fellow Jean Claude Rodriguez Ferrera’s Association of Self-Financed Communities shows that the economically disenfranchised often lack the basic rights and access to financial services necessary to put their assets to work. The group’s Self-Managed Financial Communities (CAFs) provide immigrants access to flexible credit that enables them to cover basic needs while they focus on larger ambitions. CAFs also encourage saving money.

To join a group, each member is required to buy “stock” in the group; the amount purchased determines his or her capacity for credit. This capital allows each member to request small loans for which he or she pays a certain amount of interest determined by the group. The interest paid by the members who request loans provides a profit for the other members of the community.

Today over 3 million people participate in CAFs. Because the community profits more when CAF members use the money effectively, CAFs have helped align community interests. As a result, community members are often willing to provide CAFs with more assets than can be put to use.

This case and many others—such as Steve Rothschild’s Human Capital Performance Bonds in the U.S.—have demonstrated that the challenge is a lack of access to flexible financial services, not the lack of assets.

Impact investing has the potential to spur and leverage innovations that address this fundamental challenge. But to realize the promise of impact investing, we have to avoid the temptation of taking a low-risk investor-centric approach.

To do this, we must create a financial environment that favors value-based entrepreneurship and fosters innovations through the wise allocation of philanthropic and investment capital.

Ultimately, the effectiveness of the industry will be determined by its success in addressing global challenges.

The growing amount of impact investment capital offers a significant complement to government aid and philanthropic dollars. Grants are a scarce and precious funding stream, and they must continue to play a key role in addressing global poverty. Impact investments have the potential to offer a new, large pool of money directed toward alleviating poverty and mitigating climate change. By providing capital to organizations with viable revenue models, impact investing not only directly increases the amount of available capital; it also helps direct philanthropic and government dollars to those ventures that need support.

Because of its novelty, it is particularly important for impact investors to measure and track the social and environmental performance of their portfolios with the same rigor used to monitor financial returns. New tools for the industry—including the Impact Reporting and Investment Standards (IRIS) and the Global Impact Investing Rating System (GIIRS)—are helping mission-driven investors and entrepreneurs apply standardized metrics to evaluate and improve nonfinancial performance.

The growth of the impact investing industry is exciting because it can harness a vast new capital stream to support the innovative ideas and businesses addressing poverty and other global challenges.

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